CSRA (CSRA) Beats On Q4 Earnings, Set To Buy NES Associates

CSRA Inc. (NYSE:CSRA) reported earnings of 49 cents per share in fourth-quarter fiscal 2017, surpassing the Zacks Consensus Estimate by 3 cents and increased 6.5% on a year-over-year basis.

Revenues of $1.25 billion decreased almost 3% from the year-ago quarter and were slightly lower than the Zacks Consensus Estimate. Segment wise, Defense and Intelligence (43.9% of revenues) decreased 4.7% to $551 million. Civil (56.1% of revenues) dipped 1.3% to $703 million.

Bookings totaled $1.3 billion in the reported quarter, representing a book-to-bill ratio of 1.1 times. Moreover, 56% of bookings in the quarter were for new business, while the win rate on new business was well above management’s target of 25%.

CSRA’s backlog of signed business orders was $15.2 billion, of which $2.4 billion was funded at the end of the quarter.

The company also announced that it has signed definitive agreement to acquire NES Associates. The acquisition will improve expertise in defense telecom, infrastructure and applications architecture as well as implementation services.

We note that shares were up almost 8% in pre-market trading. CSRA stock has gained 22.6% as compared with S&P 500’s return of 15% over the last year.

Fiscal 2017 at a Glance

In fiscal 2017, total revenue declined almost 4% over fiscal 2016 to $4.99 billion. This was within management’s guided range of $4.960–$5.010 billion. Bookings totaled $6.9 billion, representing a book-to- bill ratio of 1.4 times.

Improvement in adjusted EBITDA was noticeable, as it grew 0.6% over fiscal 2016 to $792 million, but missed management’s guided range of $857–$867 million. Adjusted EBITDA margin expanded 80 basis points (bps) to 15.9% in fiscal 2017.

Earnings advanced roughly 9.8% to $1.91 per share, which missed management’s guided range of $1.98–$2.02 per share.

CSRA stated that free cash flow increased from $278 million at the end of fiscal 2016 to $328 million at the end of fiscal 2017.

EBITDA margin Improves in Q4

Adjusted EBITDA was $207 million up 5.1% from the year-ago quarter. EBITDA margin of 16.5% expanded 120 basis points (bps) from the year-ago quarter. Management noted that the EBITDA margin is above the company’s long-term target and benefited from strong contract performance and disciplined cost management.

Adjusted EBITDA excludes $61 million of expense related to the amendment of the Intellectual Property Matters Agreement with DXC Technology (NYSE:DXC) , formerly known as Computer Sciences Corp and another $5 million of other separation, merger, and integration costs; $16 million of pension and other post-retirement benefit (OPEB) plans mark-to-market expense; $20 million of other pension benefits; and $11 million of amortization from acquisition-related intangible assets.

Contract mix as a percentage of total revenue was favorable. Management noted that 45% was on fixed price contracts, 21% on time and material contracts and 34% on cost plus contracts.

Selling, general and administrative expense (SG&A) as percentage of revenues remained flat at 4% on a year-over-year basis.

Segment operating margin expanded 490 bps on a year-over-year basis to 17.3%. Defense and Intelligence segment operating margin expanded 100 bps, while Civil segment operating margin expanded a massive 390 bps in the reported quarter.

Cash & Debt Declines

Cash & cash equivalents as of Mar 31, 2017 was $126 million, down $36 million from the previous quarter.

During the quarter, CSRA used $20 million to pay down debt and returned $16 million to shareholders as part of regular quarterly cash dividend program.

End-Market Outlook Improves

Management stated that it now expects a slight improvement in the level of federal spending (earlier expectation was 1% growth per annum). The company believes that it is well positioned to grab opportunities under Trump administration, whose priority includes defense, border security, cybersecurity and veteran care.

CSRA noted that the absence of $18 billion initially proposed cuts for domestic spending and flat discretionary budgets for the civil agencies are positives for growth prospects.

Management believes that improved visibility around budget and increased spending levels will lead to stronger-than-usual award activity in the June and September quarters. CSRA continues to believe that it can produce organic growth in fiscal 2018 (2–3%) based on improving macro-environment.

CSRA forecasts revenues to be in the range of $5.000–$5.200 billion for fiscal 2018. Adjusted EBITDA is anticipated to be in the range of $770–$800 million. Earnings are anticipated to be in the range of $1.88–$2.00 per share.

Free cash flow is anticipated to be in the range of $330–$380 million.

Zacks Rank & Key Picks

CSRA carries a Zacks Rank #3 (Strong Buy). Quantum Corp (NYSE:QTM) and Western Digital (NASDAQ:WDC) are two stocks worth looking in the broader sector, as both of them sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Quantum and Western Digital are pegged at 20% and 4.75%, respectively.

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